The Short Run Weekly Issue 77

Fellow Shortrunners,

     There was a great deal going on in the world economy this week. Various organizations in the United States released more depressing figures suggesting that the world's largest economy is contracting, with manufacturing activity curtailing at a blazing speed. What's more, worldwide slowdown has cut demand for petroleum and other raw commodities, pushing their prices so low that many releases such as the total producer and consumer price index are suggesting a climate of deflation (falling prices). West Texas Intermediate, a standard oil price watched by economists, has fallen in price nearly halfway from its peak, and the economic clout of OPEC is coming into question as non-OPEC members, namely Russia, are failing to cooperate.

     With its third quarter GDP release on Friday, Taiwan found itself joining a recent string of nations to have fallen into recession, with its output declining at a whopping annualized rate of 4.25%. In Doha, Qatar, members of the World Trade Organization came to some new agreements in a much less politicized event than their last meeting in Seattle. Issues at stake included TRIPS, which has to do with intellectual property. More specifically, developing countries want more leniency with respect to pharmaceuticals in the interest of public health. To the United States, which stands to be largely affected by the agreement, pharmaceutical companies worry that arbitrage and espionage will damage pharmaceuticals' bottom lines as well as their research and development efforts. For those who would like to read more about TRIPS or the Doha round of negotiations, further information is headlined on the WTO's website www.wto.org.

     Aside from venturing to the movies this weekend to watch the new Harry Potter movie, which had the largest ever box office weekend, it appears that Americans are tightening their belts and that the economy is indeed heading towards, if not already in, a recession. Finally, in light of recent economic news, both domestic and abroad, the International Monetary Fund revised its widely watched growth estimates this Thursday. They cut their estimate of economic output across the board, predicting slower growth in the United States in 2001 and 2002, as well as slower global output. Their revisions suggested even worse news for the land of the rising sun, as Japan's economy is now forecasted to contract by about 1% this year as well as next year. The IMF's previous estimates had come under scrutiny as being overly optimistic. Unfortunately, if we continue to see economic releases such as this week's industrial production, we may just see the IMF returning to the drawing board yet again.

Sincerely,
Daniel Hicks

Economic Releases

The data section provides charts and data for the most important economic indicators.

Retail Sales: 7.1%

During the month of October, retail sales rebounded to increase over 7% for the month. Strong gains were made in the automobile sector, which is gaining from lower interest rates and the marketing options that they provide as well as from the apparel industry. Just an FYI for those who don't keep up with retail sales figures, this release is the largest month to month increase that the index has ever recorded. Some of the jump is overstated however, as sales were depressed during September for obvious reasons.

Business Inventories: -0.9%

Business Inventories fell 0.9% in October. Even taking this into account, the drop off in actual sales in September pushed the inventory to sales ratio, an important gauge of inventory activity, up to 1.45 from 1.42. The large jump in retail sales in October, however, suggests that this figure is a one time phenomenon and will probably move back to more reasonable levels next month.

Jobless Claims: 444,000

Shedding 8,000 from last week's figure, initial jobless claims declined to 444,000, which is a piece of good news. Unfortunately, continuing claims, those who are still out there seeking a job, continued its rise, climbing to nearly 3.8 million, suggesting that the overall unemployment release will show further deterioration in the labor market.

Consumer Price Index: -0.3% (Core 0.2%)

The consumer price index actually showed signs of deflation during October as the overall price index dropped. This suggests that a typical basket of goods that a consumer might buy actually costs less than it did during the month before. That said, the most likely reason that the prices declined was falling demand, which is pushing prices downward, particularly with respect to energy (This is further evidenced by the fact that the core index, which ignores energy and food prices, rose 0.2%).

Industrial Production: -1.1%

Continuing its horrific slide, industrial production contracted another 1.1% during October. The index is a clear indication of a severe decrease in manufacturing output almost across the board in the United States. Capacity Utilization, a measure of to what extent the total amount of productive capital is being employed, declined to 74.8%. The downward turn suggests that there is a great deal of surplus capacity in the economy. Surplus capacity will mean that price pressures from the supply side should be mute, and at the same time that investment activity should be light.

NAHB Housing Market Index: 49%

In what is shaping to be an across the board economic slowdown, the housing market, the last bastion of strong economic growth in the economy, appears to be weakening. The NAHB Housing Market Index released last week and covering November suggests that housing sales and prices are moderating in spite of the large amount of refinancing and low interest rates.

ECRI Weekly Leading Index: 115.9

The ECRI WLI slipped to 115.9, a slight decrease from last weeks figure. The index, which has been fluctuating pretty strongly between both positive and negative moves shows no real clear trend for the economy, a sign that economic stagnation is setting in and so far offers no suggestion of a near term recovery.

Classroom

Check out the new classroom section and watch for it to grow and change in the coming weeks as we implement drastic reconstruction to the section. Comment and suggestions as to the best method for this kind of a section would be extremely helpful.

Articles / Book Reviews

Newest Articles:

Balance East and West
- Contributed by Kautilya AKD

Bush's Tax Plan Just Doesn't Cut It
- by Alex Rothenberg

Newest Book Reviews:

Money and Power by Howard Means
The Firm, The Market and The Law by Ronald Coase
Megatrends Asia by John Naisbitt
Geography and Trade by Paul Krugman
Fuzzy Math by Paul Krugman
Growth Theory: An Exposition by Robert Solow